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What's in store for future financial reporting?
Due to the rise of financial schemes and corporate scandals in the last decade (i.e. Enron, WorldCom, Bernie Madoff's Ponzi investment scheme, Lehman Bros, etc), global investors are demanding stricter corporate governance and compliance requirements for publicly held companies. What's in store for future financial reporting?
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4 Answers
It's a bit misleading to put Madoff & Enron in the same sentence, because Enron has already had a (heavy-handed-knee-jerk) response - SOX.
SOX is the classic missile-to-kill-a-fly syndrome. Not that Enron was not a huge issue, but the problem was in not implementing existing laws. The part of SOX that addresses the Auditor/Auditee relationship, coupled with the personal liability added to the CEO & CFO, was more than sufficient to deal with the issues resulting from that debacle. The additional need to audit compliance with a heavy-handed, Fortune-500-level anti-fraud framework was just plain overkill.
So, I think the appetite for further regulation of corporate releases is likely minimal. Companies swallowed SOX - they won't swallow a second such behemoth. New regulation resulting from Madoff will likely focus on increasing scrutiny of hedge funds, derivatives, and other "rocket science".
However, there should also be a huge amount of soul searching in the investment community. People seeking unbelievable returns got exactly what a "reasonable investor" would expect - unbelievable losses. We seem to have forgotten to begin our investment with a healthy dose of skepticism. A return to prudent thought and due diligence will make for less need for regulation, and an overall healthier investing environment.
There is definitely a need to regulate the financial institutions and financial services companies. There should be a higher disclosure requirements to the investors of the manager the funds would get invested. the Government should regulate certain types of investments by such institution. Flight of money to forign location should be closely scrutinzed.
I don't think that financial reporting will become worse that SOX made it. But it will change for larger companies with the International Standards which will not be GAAP accounting. I personally have not yet investigated the impact of IFRS on the smaller companies with which I work; it may not be significant since I doubt that basic accrual accounting will change much.
It also remains to be seen what the IRS would do with different accounting standards. IFRS could increase the number of book to tax adjustments if the IRS takes a dim view of some of the changes.
Who's rules are going to regulate financial reporting, the US, Europe, China? This is significant due to disclosure requirements. Already the NYSE is losing business to other exchanges due to reporting reguirements. The world's largest IPO was done in Hong Kong I believe. This is going to be very important as is IFRS and XBRL in public documents. But you have to make a distinction between external and internal reporting. Here I am only speaking of external reporting.
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